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Posts Tagged ‘contrast effect’

Sustainability Risk Management and Reputation Risk

Monday, November 9th, 2009

If you haven’t already been confronted with the implications of SRM in business, Harvard Business Publishing’s blog excerpted below adds some food for thought on how this is spreading.  This movement has not been lost on the Fortune 100 and even small companies need to pay attention to the the reputational implications or risk falling behind the wave of a rapidly retooling future-looking group.  We say stay well out ahead of this wave – anticipating what is coming.  If you want help staying positioned to manage your risks we are here to help.

“Here’s yet another concern for investors: sustainability risk management, or SRM. While the basic concept has been around for years, emerging market forces are creating a new strain of investor sustainability risk: point-of-purchase reputation risk. Disruptive systems are on the verge of revealing ecological impacts of products that could sink some brands — and boost others.

Regulatory and litigation risks have become familiar, and most companies have learned to avoid or manage them. The new kid on the block — reputation risk — may grow to be the most important for many businesses. One big reason? With Wal-Mart’s announcement in July that it is working with an academic consortium to develop a sustainability index for rating products, a never-seen-before level of transparency seems headed for their stores. Other retailers like Safeway and Best Buy are showing interest in adopting a similar rating.

Here’s the way the ecological transparency index seems likely to work. Wal-Mart’s house brand division is already piloting seven existing products, asking suppliers to assess those products on four dimensions of sustainability: resource use, including nonrenewables; impact on climate change; impact on ecosystems throughout the product’s supply chain; and impact on human health. Data like this, apparently, will become the basis for sustainability ratings that will be posted so shoppers can compare brands in the store aisles.

Unveiling the ecological impacts of products to consumers will likely create instant winners and losers. Signs in store aisles would be much more effective than online systems, and this point-of-purchase comparison sets the stage for what psychologists call the “contrast effect.” The discovery that your child’s toy contains a toxic substance like lead activates disgust — and the toxin-free toy you are comparing it with looks all the better.

Adapting to reputation risk will require a new mindset. Take a paper company that has excellent practices in its mills — lower chlorine use, good wastewater systems, alternative energy use, and the like. But the company still sources its wood from virgin forests — a practice that will make it a laggard if its competitors no longer use virgin wood.

To become less susceptible to this new risk, investors might favor companies that use life cycle assessment to identify the impact profile of their products, benchmark those scores against industry averages, and find innovative solutions that raise their ecological scores in the marketplace.

Lowering sustainability risks that in turn can affect long-term profitability and growth potential has become a mandate at an increasing number of companies. The Sustainable Investment Research Analyst Network (SIRAN) reported in July that annual reports from 86 of the 100 largest publicly traded U.S. companies include sustainability initiatives, and 34 report measurable goals.

Investors are taking note. The Investor Network on Climate Risk has 80-plus members representing over $60 trillion (including BlackRock and CalPERS). While climate concerns have been at the forefront for investors like these, social sustainability — such as how workers are treated — has been an additional focus of late. And as new ecological transparency systems come online, that focus will most certainly broaden.

Investors can minimize their exposure to the risk of supporting companies more likely to lose in this reputation battle. “What’s been missing is what we are all working towards: meaningful metrics on the climate impacts at the product level,” says People4Earth’s Tulay, adding that this is what life cycle assessment systems like Earthster and GoodGuide seek to capture and quantify. Tulay adds, “Investors should demand ecological transparency from companies.”

Excerpted from Harvard Business Publishing’s Daniel Goleman blog. See link for full article


Meridian is a highly dynamic specialized insurance consulting group and broker  with offices in Boston, MA, Newport, RI and Brookfield, CT. We specialize in risk management and risk transfer for companies interested in sustainable practice. We also promote sustainable practices and are members of the Sustainable Business Network and Slow Money Alliance. Our Mission is simple.  We seek to help our clients make the best risk and risk transfer decisions possible.

We bring market-leading service to the most creative solutions in the risk management field to ensure that each Meridian client achieves their risk objectives.